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Microsoft’s two Smartest Decisions in the last 15 years

Howard Owen’s post on newspaper’s Original Sin got me thinking about the merits of keeping a new business tethered to an existing (and dominant) business inside a corporation. There are many arguments for it including being able to leverage the mother-ship for promotion, some initial cost savings, etc. Newspapers are increasingly being characterized as dinosaurs but even more contemporary companies such as Microsoft have often fallen back on the same strategy.

Nonetheless, there have been two notable exceptions at Microsoft in the last 10+ years. One could make the argument that they are the two biggest successes to emanate out of Microsoft during the same time period.

The first was Expedia. While it started in the mid-90′s, the pivotal decision was to enable Expedia to spin out of Microsoft in the late 90′s. Rich Barton and the Expedia team were getting increasingly hampered by being inside of Microsoft. Not unlike newspapers, the entrenched business and salesforce at Microsoft that sold software into the travel industry wasn’t happy with what the pain-in-the-rear little division inside of MSN was doing. The traditional salesforce would have to deal with their United Airlines and other big travel company companies squawking about Expedia and how it was threatening their business.

Meanwhile, Rich had to do his best to appease Ballmer and others while trying to act like a true travel business. That meant thinking solely about travel consumers and suppliers. Inevitably, that conflicted with thinking of a traditional software company. Ultimately, Rich was able to convince Bill and Steve to allow for the spinout.

The ability to combine the talent that Microsoft was able to recruit at that point with being unfettered by the mother-ship led to years of unbridled success. Microsoft profited handsomely when Expedia went public and was later purchased by Barry Diller’s IAC.

The second smart decision was how Microsoft dealt with Xbox. While it didn’t spin out completely, it was allowed freedom that divisions such as MSN could only dream about. The leadership of Xbox such as Robbie Bach, J Allard, Ed Fries and others were able to successfully separate Xbox from the mother-ship. This included physical separation where they were several miles from the main campus. In addition, there was cultural and technological separation.

When one visited the Xbox team, it felt like going to a separate company with a separate culture. The type of talent hired by Xbox was often quite different. Just as pivotal was the decision to not tie Xbox to Windows.

Just as Expedia was able to act like a company native to the Travel industry, Xbox was able to act like a company native to the Game industry. Microsoft already had a modestly successful Game business inside the mother-ship but it was only once they created a separate brand and platform that Microsoft was able to have success at the scale of a Nintendo or Sony. It is now a profitable multi-billion dollar business.

In contrast, compare MSN to what Microsoft did with Expedia and Xbox. MSN has, for the most part, struggled since it was founded by a former Windows product manager. The ISP business has never been a success. There has been one significant window of success that MSN had early in this decade and it was almost by accident. Most of senior management attention was focused on yet another run at AOL’s access business with the MSN 8 launch that was supposed to be yet another “AOL Killer”. Meanwhile, off the radar was the advertising business.

The MSN advertising business hired in ad industry veterans such as Joanne Bradford in the States and Chris Dobson in Europe. Working with them were many people both from the ad industry and in other parts of Microsoft primarily outside of the so-called monopoly businesses of Windows and Office. Remarkably, it became both the next $1B business, it also achieved its first profit which proved to be fleeting. Unfortunately, that success invited more attention from senior management who looked at the world through the Windows and Office prism.

While MSN 8 floundered, they needed another horse to ride. MSN became filled with former Windows and Office people. The number of times I heard “this is just like Windows/Office” was too numerous to count. Time has proven what many who left the MSN division knew — no, the Internet ad business is nothing like the Windows/Office business and bolting on Windows or Office brands to online businesses did little to help them.

Thus, when it comes to MSN, Microsoft’s “Original Sin” is similar to what Howard Owens laid out in his piece. By tying MSN to the mothership too tightly, it has failed to fully capitalize on its people and technology assets which are ample. I thought when there were Yahoo merger talks there was another hope. That is, had Yahoo been able to operate under the Xbox model (separated physically but not subject to short-term public market demands), the Yahoo/MSN combo would be potent. Perhaps that chapter still will get written.